Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
1. |
Business
and Structure |
Lightstone
Value Plus REIT II, Inc. (“Lightstone REIT II”), is a Maryland corporation formed on April
28, 2008, which elected to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes beginning
with the taxable year ended December 31, 2009.
Lightstone
REIT II is structured as an umbrella partnership REIT, or UPREIT, and substantially all of its current and future business will be conducted
through Lightstone Value Plus REIT II LP, a Delaware limited partnership (the “Operating Partnership”). As of March 31, 2023,
Lightstone REIT II held an approximately 99% general partnership interest in the Operating Partnership’s common units.
Lightstone
REIT II and the Operating Partnership and its subsidiaries are collectively referred to as the “Company” and the use of “we,”
“our,” “us” or similar pronouns in these consolidated financial statements refers to Lightstone REIT II, its
Operating Partnership or the Company as required by the context in which such pronoun is used.
Through
the Operating Partnership, the Company owns and operates commercial properties and makes real estate-related investments. Since its inception,
the Company has primarily acquired and operated commercial hospitality properties, principally consisting of limited-service-hotels all
located in the United States. However, its commercial holdings may also consist of full-service hotels, and to a lesser extent, retail
(primarily multi-tenanted shopping centers), industrial and office properties. The Company’s real estate investments are held by
it alone or jointly with other parties. In addition, the Company may invest up to 20% of its net assets in collateralized debt obligations,
commercial mortgage-backed securities (“CMBS”) and mortgage and mezzanine loans secured, directly or indirectly, by the same
types of properties which it may acquire directly. Although most of its investments are these types, the Company may invest in whatever
types of real estate or real estate-related investments that it believes are in its best interests. The Company evaluates all of its
real estate investments as one operating segment. The Company currently intends to hold its investments until such time as it determines
that a sale or other disposition appears to be advantageous to achieve its investment objectives or until it appears that the objectives
will not be met.
As
of March 31, 2023, the Company (i) majority owned and consolidated the operating results and financial condition of 12 limited service
hotels containing a total of 1,582 rooms, (ii) held an unconsolidated 48.6% membership interest in Brownmill, LLC (the “Brownmill
Joint Venture”), an affiliated entity that owns two retail properties, and (iii) held an unconsolidated 50.0%
membership interest in LVP LIC Hotel JV LLC (the “Hilton Garden Inn Joint Venture”), an affiliated real estate entity that
owns one hotel. The Company accounts for its membership interests in the Brownmill Joint Venture and the Hilton Garden Inn
Joint Venture under the equity method of accounting.
The
Brownmill Joint Venture owns Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn Mall, located in Vauxhaull, New
Jersey. The Hilton Garden Inn Joint Venture owns a 183-room, limited-service hotel (the “Hilton Garden Inn – Long Island
City) located in the Long Island City neighborhood in the Queens borough of New York City. Both the Brownmill Joint Venture and the Hilton
Garden Inn Joint Venture are between the Company and related parties.
As
of March 31, 2023, seven of the Company’s consolidated limited service hotels are held in LVP Holdco JV LLC (the “Hotel Joint
Venture”), a joint venture formed between the Company and Lightstone Value Plus REIT I, Inc. (“Lightstone REIT I”),
a related party REIT also sponsored by The Lightstone Group, LLC. The Company and Lightstone REIT I have 97.5% and 2.5% membership
interests in the Hotel Joint Venture, respectively. Additionally, as of March 31, 2023, one of the Company’s consolidated hotels
also has ownership interests held by unrelated minority owners. The membership interests of Lightstone REIT I and the unrelated minority
owners are accounted for as noncontrolling interests.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
The
Company’s advisor is Lightstone Value Plus REIT II LLC (the “Advisor”), which is majority owned by David Lichtenstein.
On May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited partner common units
in the Operating Partnership. The Advisor also owns 20,000 shares of the Company’s common stock (“Common Shares”)
which were issued on May 20, 2008 for $200, or $10.00 per share. Mr. Lichtenstein also is a majority
owner of the equity interests of the Lightstone Group, LLC. The Lightstone Group, LLC served as the Company’s sponsor
(the “Sponsor”) during its initial public offering (the “Offering”) and follow-on offering (the “Follow-on
Offering”, and collectively, “the Offerings”), which terminated on August 15, 2012 and September 27, 2014, respectively.
The Advisor, pursuant to the terms of an advisory agreement, together with the Company’s board of directors (the “Board of
Directors”), is primarily responsible for making investment decisions on behalf of the Company and managing its day-to-day operations.
Through his ownership and control of the Lightstone Group, LLC, Mr. Lichtenstein is the indirect owner and manager of Lightstone SLP
II LLC, a Delaware limited liability company (the “Associate General Partner”), which has subordinated profits interests
in the Operating Partnership (“Subordinated Profits Interests”) which were acquired for aggregate consideration of $17.7 million
in connection with the Company’s Offerings. Mr. Lichtenstein also acts as the Company’s Chairman and Chief Executive Officer.
As a result, he exerts influence over but does not control Lightstone REIT II or the Operating Partnership.
The
Company has no employees. The Company’s Advisor and its affiliates perform a full range of real estate services for it, including
asset management, accounting, legal, and property management, as well as investor relations services.
The
Company is dependent on the Advisor and its affiliates for services that are essential to it, including asset management and acquisition,
disposition and financing activities, and other general administrative responsibilities. If the Advisor and its affiliates are unable
to provide these services to the Company, it would be required to provide the services itself or obtain the services from other parties.
The
Company also uses other unaffiliated third-party property managers, principally for the management of its hospitality properties.
The
Company’s Common Shares are not currently listed on a national securities exchange. The Company may seek to list its Common Shares
for trading on a national securities exchange only if a majority of its independent directors believe listing would be in the best interest
of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be
any market for its Common Shares until they are listed for trading.
On
January 17, 2023, the Company’s stockholders approved an amendment and restatement to the Company’s charter pursuant
to which the Company is no longer required to either
(a) amend its charter to extend the deadline to begin the process of achieving a liquidity event, or (b) hold a stockholders meeting
to vote on a proposal for an orderly liquidation of its portfolio.
Noncontrolling
Interests
Partners
of the Operating Partnership
Limited
Partner
On
May 20, 2008, the Advisor contributed $2 to the Operating Partnership in exchange for 200 limited
partner common units in the Operating Partnership. The Advisor has the right to convert limited partner common units into cash or, at
the Company’s option, an equal number of Common Shares.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Associate
General Partner
In
connection with the Company’s Offerings, the Associate General Partner contributed (i) cash of $12.9 million and (ii) equity
interests totaling 48.6% in the Brownmill Joint Venture, which were valued at $4.8 million, to the Operating Partnership in
exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an aggregate value of $17.7 million.
As
the indirect majority owner of the Associate General Partner, Mr. Lichtenstein is the beneficial owner of a 99% interest in such
Subordinated Profits Interests and thus receives an indirect benefit from any distributions made in respect thereof.
These
Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular distributions that the Company makes
to its stockholders, but only after its stockholders have received a stated preferred return. There were no distributions declared on
the Subordinated Profits Interests for any periods after December 31, 2019. Since the Company’s inception through March 31, 2023,
the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions
on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return.
The
Subordinated Profits Interests may also entitle the Associate General Partner to a portion of any liquidating distributions made by the
Operating Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Company and,
therefore, cannot be determined at the present time. Liquidating distributions to the Associate General Partner will always be subordinated
until stockholders receive a distribution equal to their initial investment plus a stated preferred return.
See
Note 7 for additional information with respect to the Subordinated Profits Interests.
Other
Noncontrolling Interests in Consolidated Subsidiaries
Other
noncontrolling interests consist of the (i) membership interest in the Joint Venture held by Lightstone REIT I and (ii) membership interests
held by minority owners in one of the Company’s hotels.
Related
Parties
The
Company’s Sponsor, Advisor and its affiliates, including the Associate General Partner, are related parties of the Company as well
as the other public REITs also sponsored and/or advised by these entities. Certain of these entities are entitled to compensation and
reimbursement for services and costs incurred related to the investment, management and disposition of the Company’s assets during
its acquisition, operational and liquidation stages. The compensation levels during the Company’s acquisition and operational stages
are based on the cost of acquired properties/investments and the annual revenue earned from such properties/investments, and other such
fees and expense reimbursements as outlined in each of the respective agreements. See Note 7 for additional information.
| 2. | Summary
of Significant Accounting Policies |
Principles
of Consolidation and Basis of Presentation
The
consolidated financial statements include the accounts of Lightstone REIT II and its Operating Partnership and its subsidiaries, over
which the Company exercises financial and operating control. As of March 31, 2023, Lightstone REIT II had a 99% general partnership interest
in the common units of the Operating Partnership. All inter-company balances and transactions have been eliminated in consolidation.
In addition, interests in entities acquired are evaluated based on accounting principles generally accepted in the United States of America
(“GAAP”), and entities deemed to be variable interest entities (“VIE”) in which the Company is the primary beneficiary
are also consolidated. If the interest in the entity is determined not to be a VIE, then the entity is evaluated for consolidation based
on legal form, economic substance, and the extent to which the Company has control, substantive participating rights or both under the
respective ownership agreement. For entities in which the Company has less than a controlling interest or entities which it is not deemed
to be the primary beneficiary, it accounts for the investment using the equity method of accounting.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
The
accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited Consolidated
Financial Statements of the Company and related notes as contained in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2022. The unaudited interim consolidated financial statements include all adjustments (consisting only of normal recurring
adjustments) and accruals necessary in the judgment of management for a fair statement of the results for the periods presented. The
accompanying unaudited consolidated financial statements of the Lightstone Value Plus REIT II, Inc. and Subsidiaries have been prepared
in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements.
GAAP
requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during a reporting period. The
most significant assumptions and estimates relate to the valuation of investment properties and investments in other unconsolidated real
estate entities and depreciable lives of long-lived assets. Application of these assumptions requires the exercise of judgment as to
future uncertainties and, as a result, actual results could differ from these estimates.
The
consolidated balance sheet as of December 31, 2022 included herein has been derived from the consolidated balance sheet included in the
Company’s Annual Report on Form 10-K.
The
unaudited consolidated statements of operations for interim periods are not necessarily indicative of results for the full year or any
other period.
To
qualify or maintain our qualification as a REIT, the Company engages in certain activities through wholly-owned taxable REIT subsidiaries
(“TRS”). As such, it is subject to U.S. federal and state income and franchise taxes from these activities.
Income
Taxes
The
Company has elected to be taxed as a REIT commencing with the taxable year ended December 31, 2009. If the Company qualifies as a REIT,
it generally will not be subject to U.S. federal income tax on its taxable income or capital gain that it distributes to its stockholders.
To maintain its REIT qualification, the Company must meet a number of organizational and operational requirements, including a requirement
that it annually distribute to its stockholders at least 90% of its REIT taxable income (which does not equal net income, as calculated
in accordance with GAAP), determined without regard to the deduction for dividends paid and excluding any net capital gain. If the Company
fails to remain qualified for taxation as a REIT in any subsequent year and does not qualify for certain statutory relief provisions,
its income for that year will be taxed at the regular corporate rate, and it may be precluded from qualifying for treatment as a REIT
for the four-year period following its failure to qualify as a REIT. Such an event could materially adversely affect the Company’s
net income and net cash available for distribution to stockholders.
Revenues
The
following table represents the total revenues from hotel operations on a disaggregated basis:
| Schedule of revenues from hotel operations | |
| | | |
| | |
| | |
For
the
Three Months ended
March 31, | |
| |
2023 | | |
2022 | |
| Revenues | |
| | | |
| | |
| Room | |
$ | 13,325 | | |
$ | 12,507 | |
| Food,
beverage and other | |
| 658 | | |
| 570 | |
| Total
revenues | |
$ | 13,983 | | |
$ | 13,077 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Disposition
Activities
During
the three months ended March 31, 2023, the Company recognized a gain on the sale of investment property of $0.3 million related to the
sale of one of its hotels in 2017.
Disposition
of the Courtyard – Paso Robles
On
March 22, 2022, the Company completed the disposition of a 130-room hotel located in Paso Robles, California, which operates as
a Courtyard by Marriott (the “Courtyard – Paso Robles”), to an unaffiliated third party, for a contractual sales price
of $32.3 million. In connection with the transaction, the Company also fully defeased a mortgage loan with an outstanding principal
balance of $13.4 million at a total cost of $14.1 million and its net proceeds after closing and other costs, pro rations and
working capital adjustments were $17.8 million. In connection with the disposition of the Courtyard – Paso Robles, the Company
recognized a gain on the sale of investment property of $7.7 million during the first quarter of 2022.
Disposition
of the TownePlace Suites - Little Rock
On
July 14, 2022, the Company completed the disposition of a 92-room hotel located in Little Rock, Arkansas, which operates as a TownePlace
Suites (the “TownePlace Suites - Little Rock”), to an unaffiliated third party, for a contractual sales price of $5.9 million.
In connection with the disposition of the TownePlace Suites - Little Rock, the Company used proceeds of $4.6 million to make a principal
paydown on its revolving credit facility (the “Revolving Credit Facility”) and
its net proceeds after closing and other costs, pro rations and working capital adjustments were $1.2 million. In
connection with the disposition of the TownePlace Suites - Little Rock, the Company recognized gain on the sale of investment property
of $0.8 million during the third quarter of 2022.
The
dispositions of the Courtyard – Paso Robles and the TownePlace Suites - Little Rock did not qualify to be reported as discontinued
operations since the dispositions did not represent a strategic shift that had a major effect on the Company’s operations and financial
results. Accordingly, the operating results of the Courtyard – Paso Robles and the TownePlace Suites - Little Rock are reflected
in the Company’s results from continuing operations for all periods presented through their respective dates of disposition.
Gain
on Forgiveness of Debt
During
the three months ended March 31, 2022, notice was received from the U.S. Small Business Administration that $0.6 million of the Company’s
Paycheck Protection loans and related accrued interest had been legally forgiven and therefore, it recognized a gain on forgiveness of
debt for that amount during the period.
Recently Adopted Accounting Standards
In
June 2016, the Financial Accounting Standards Board issued an accounting standards
update, “Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments,”
which changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair
value through net income. The updated standard replaces the current “incurred loss” approach with an “expected loss”
model for instruments measured at amortized cost. For trade and other receivables and held to maturity debt securities,
entities are required to use a new forward looking expected loss model that generally will result in the earlier recognition of allowances
for losses. The Company has adopted this standard noting that it did not have a material impact on the Company’s financial statements
or related disclosures.
Adverse
Developments Affecting the Financial Services Industry and Concentration of Risk
As
of March 31, 2023 and December 31, 2022, the Company had cash deposited in certain financial institutions in excess of federally
insured levels. The Company regularly monitors the financial stability of these financial institutions and believes that it is not exposed
to any significant credit risk in cash and cash equivalents. However, in March and April 2023, certain U.S. government banking regulators
took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused general heightened
uncertainties in financial markets. While these events have not had a material direct impact on the Company’s operations, if further
liquidity and financial stability concerns arise with respect to banks and financial institutions, either nationally or in specific regions,
the Company’s ability to access cash or enter into new financing arrangements may be threatened, which could have a material adverse
effect on its business, financial condition and results of operations.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Current
Environment
The
Company’s operating results and financial condition are substantially impacted by the overall health of local, U.S. national and
global economies and may be influenced by market and other challenges. Additionally, its business and financial performance may be adversely
affected by current and future economic and other conditions; including, but not limited to, availability or terms of financings, financial
markets volatility and uncertainty as a result of recent banking failures, political upheaval or uncertainty, natural and man-made disasters,
terrorism and acts of war, unfavorable changes in laws and regulations, outbreaks of contagious diseases, cybercrime, loss of key relationships,
inflation and recession.
The
Company’s overall performance depends in part on worldwide economic and geopolitical conditions and their impacts on consumer behavior.
Worsening economic conditions, increases in costs due to inflation, higher interest rates, certain labor and supply chain challenges,
developments related to the COVID-19 pandemic and other changes in economic conditions may adversely affect the Company’s results
of operations and financial performance.
| 3. | Investments
in Unconsolidated Affiliated Entities |
The
entities listed below are partially owned by the Company. The Company accounts for these investments under the equity method of accounting
as the Company exercises significant influence, but does not exercise financial and operating control over these entities. A summary
of the Company’s investments in the unconsolidated affiliated entities is as follows:
| Schedule of investments in the unconsolidated affiliated real estate | |
| | |
| | |
As of | |
| Entity | |
Date of Ownership | | |
Ownership % | | |
March 31,
2023 | | |
December 31,
2022 | |
| Brownmill Joint Venture | |
Various | | |
| 48.6 | % | |
$ | 4,173 | | |
$ | 4,204 | |
| Hilton Garden Inn Joint Venture | |
March 27, 2018 | | |
| 50.0 | % | |
| 9,665 | | |
| 9,589 | |
| Total investments in unconsolidated affiliated real estate entities | |
| | |
| | | |
$ | 13,838 | | |
$ | 13,793 | |
Brownmill
Joint Venture
During
2010 through 2012, the Company entered into various contribution agreements with Lightstone Holdings LLC (“LGH’’),
a wholly-owned subsidiary of the Sponsor, pursuant to which LGH contributed to the Company an aggregate 48.6% membership interest
in the Brownmill Joint Venture in exchange for the Company issuing an aggregate of 48 units of Subordinated Profits Interests,
at $100,000 per unit (at an aggregate total value of $4.8 million), to Lightstone SLP II LLC.
As
of March 31, 2023, the Company owns a 48.6% membership interest in the Brownmill Joint Venture, which is a non-managing interest. An
affiliate of the Company’s Sponsor is the majority owner and manager of the Brownmill Joint Venture. Profit and cash distributions
are allocated in accordance with each investor’s ownership percentage. The Company accounts for its investment in the Brownmill
Joint Venture in accordance with the equity method of accounting. During the three months ended March 31, 2023 and 2022, the Company
received distributions from the Brownmill Joint Venture aggregating $137 and $143, respectively.
The
Brownmill Joint Venture owns two retail properties known as Browntown Shopping Center, located in Old Bridge, New Jersey, and Millburn
Mall, located in Vauxhaull, New Jersey.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Brownmill
Joint Venture Financial Information
The
Company’s carrying value of its interest in the Brownmill Joint Venture differs from its share of member’s equity reported
in the condensed balance sheet of the Brownmill Joint Venture because the basis of the Company’s investment is in excess of the
historical net book value of the Brownmill Joint Venture. The Company’s additional basis, which has been allocated to depreciable
assets, is being recognized on a straight-line basis over the estimated useful lives of the appropriate assets.
The
following table represents the condensed statements of operations for the Brownmill Joint Venture for the periods indicated:
| Schedule of condensed income statement | |
| | | |
| | |
| | |
For the
Three Months Ended
March 31, | |
| | |
2023 | | |
2022 | |
| Revenue | |
$ | 969 | | |
$ | 1,038 | |
| Property operating expenses | |
| 238 | | |
| 449 | |
| Depreciation and amortization | |
| 186 | | |
| 212 | |
| Operating income | |
| 545 | | |
| 377 | |
| Interest expense and other, net | |
| (284 | ) | |
| (170 | ) |
| Net income | |
$ | 261 | | |
$ | 207 | |
| Company’s share of net income | |
$ | 127 | | |
$ | 101 | |
| Additional depreciation and amortization expense (1) | |
| (21 | ) | |
| (31 | ) |
| Company’s net income from investment | |
$ | 106 | | |
$ | 70 | |
| (1) | Additional
depreciation and amortization expense relates to the amortization of the difference between the cost of the interest in the Brownmill
Joint Venture and the amount of the underlying equity in net assets of the Brownmill Joint Venture. |
The
following table represents the condensed balance sheets for the Brownmill Joint Venture as of the dates indicated:
| Schedule of condensed balance sheet | |
As of | | |
As of | |
| | |
March 31,
2023 | | |
December 31,
2022 | |
| Real estate, at cost (net) | |
$ | 12,702 | | |
$ | 12,860 | |
| Cash and restricted cash | |
| 1,449 | | |
| 1,422 | |
| Other assets | |
| 1,519 | | |
| 1,283 | |
| Total assets | |
$ | 15,670 | | |
$ | 15,565 | |
| | |
| | | |
| | |
| Mortgage payable | |
$ | 13,274 | | |
$ | 13,341 | |
| Other liabilities | |
| 854 | | |
| 662 | |
| Members’ capital | |
| 1,542 | | |
| 1,562 | |
| Total liabilities and members’ capital | |
$ | 15,670 | | |
$ | 15,565 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Hilton
Garden Inn Joint Venture
On
March 27, 2018, the Company and Lightstone Value Plus REIT III, Inc. (“Lightstone REIT III”),
a related party REIT also sponsored by the Company’s Sponsor, acquired, through the newly formed Hilton Garden Inn Joint Venture,
the Hilton Garden Inn - Long Island City from an unrelated third party, for aggregate consideration of $60.0 million, which consisted
of $25.0 million of cash and $35.0 million of proceeds from a five-year term non-recourse loan from a financial institution
(the “Hilton Garden Inn Mortgage”), excluding closing and other related transaction costs.
The Company paid $12.9 million for a 50.0% membership interest in the Hilton Garden Inn Joint Venture.
The
Hilton Garden Inn Mortgage bore interest at LIBOR plus 3.15%, subject to a 5.03% floor, initially provided for monthly interest-only
payments for the first 30 months of its term with principal and interest payments pursuant to a 25-year amortization schedule thereafter,
and the remaining unpaid balance due in full at its scheduled maturity on March 27, 2023. The Hilton Garden Inn Mortgage is collateralized
by the Hilton Garden Inn – Long Island City.
The
Company and Lightstone REIT III each have a 50.0% co-managing membership interest in the Hilton Garden Inn Joint Venture. The Company
accounts for its membership interest in the Hilton Garden Inn Joint Venture in accordance with the equity method of accounting because
it exerts significant influence over but does not control the Hilton Garden Inn Joint Venture. All capital contributions and distributions
of earnings from the Hilton Garden Inn Joint Venture are made on a pro rata basis in proportion to each member’s equity interest
percentage. Any distributions in excess of earnings from the Hilton Garden Inn Joint Venture are made to the members pursuant to the
terms of the Hilton Garden Inn Joint Venture’s operating agreement. The Company commenced recording its allocated portion of profit/loss
and cash distributions beginning as of March 27, 2018 with respect to its membership interest of 50.0% in the Hilton Garden
Inn Joint Venture.
In
light of the impact of the COVID-19 pandemic on the operating results of the Hilton Garden Inn – Long Island City, the Hilton Garden
Inn Joint Venture previously entered into certain amendments with respect to the Hilton Garden Inn Mortgage as discussed below.
On
June 2, 2020, the Hilton Garden Inn Mortgage was amended to provide for (i) the deferral of the six monthly debt service payments aggregating
$0.9 million for the period from April 1, 2020 through September 30, 2020 until March 27, 2023; (ii) a 100 bps reduction in the
interest rate spread to LIBOR plus 2.15%, subject to a 4.03% floor, for the six-month period from September 1, 2020 through February
28, 2021; (iii) the Hilton Garden Inn Joint Venture pre-funding $1.2 million into a cash collateral reserve account to cover the
six monthly debt service payments due from October 1, 2020 through March 1, 2021; and (iv) waiver of all financial covenants for quarter-end
periods before June 30, 2021.
Additionally,
on April 7, 2021, the Hilton Garden Inn Joint Venture and the lender further amended the terms of the Hilton Garden Inn Mortgage to provide
for (i) the Hilton Garden Inn Joint Venture to make a principal paydown of $1.7 million; (ii) the Hilton Garden Inn Joint Venture
to fund an additional $0.7 million into the cash collateral reserve account; (iii) a waiver of all financial covenants for quarter-end
periods through September 30, 2021 with a phased-in gradual return to the full financial covenant requirements over the quarter-end periods
beginning December 31, 2021 through December 31, 2022; (iv) an 11-month interest-only payment period from May 1, 2021 through March 31,
2022; and (v) certain restrictions on distributions to the members of the Hilton Garden Inn Joint Venture during the interest-only payment
period.
As
of March 31, 2023, the Hilton Garden Inn Joint Venture was in compliance with respect to all of its financial debt covenants.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Subsequent
to the Company’s acquisition of its 50.0% membership interest in the Hilton Garden Joint Venture through March 31, 2023, it has
made an aggregate of $3.2 million of additional capital contributions (of which $0.4 million were made during the three months
ended March 31, 2023) and received aggregate distributions of $4.0 million.
On
March 27, 2023, the Hilton Garden Inn Joint Venture and the lender amended the Hilton Garden Inn Mortgage to extend the maturity date
for 90 days, through June 25, 2023, to provide additional time to finalize the terms of a long-term extension.
Hilton
Garden Inn Joint Venture Financial Information
The
following table represents the condensed statements of operations for the Hilton Garden Inn Joint Venture for the periods indicated:
| Schedule of condensed income statement | |
| | | |
| | |
| | |
For the
Three Months Ended
March 31,
2023 | | |
For the
Three Months Ended
March 31,
2022 | |
| Revenues | |
$ | 2,029 | | |
$ | 2,168 | |
| Property operating expenses | |
| 1,507 | | |
| 1,428 | |
| General and administrative costs | |
| 26 | | |
| 10 | |
| Depreciation and amortization | |
| 609 | | |
| 620 | |
| Operating (loss)/income | |
| (113 | ) | |
| 110 | |
| Interest expense | |
| (626 | ) | |
| (427 | ) |
| Net loss | |
$ | (739 | ) | |
$ | (317 | ) |
| Company’s share of net loss (50.00%) | |
$ | (370 | ) | |
$ | (158 | ) |
The
following table represents the condensed balance sheets for the Hilton Garden Inn Joint Venture as of the dates indicated:
| Schedule of condensed balance sheet | |
As of | | |
As of | |
| | |
March 31,
2023 | | |
December 31,
2022 | |
| Investment property, net | |
$ | 49,716 | | |
$ | 50,254 | |
| Cash | |
| 1,290 | | |
| 1,231 | |
| Other assets | |
| 1,023 | | |
| 1,276 | |
| Total assets | |
$ | 52,029 | | |
$ | 52,761 | |
| | |
| | | |
| | |
| Mortgage payable, net | |
$ | 32,232 | | |
$ | 32,233 | |
| Other liabilities | |
| 1,038 | | |
| 1,920 | |
| Members’ capital | |
| 18,759 | | |
| 18,608 | |
| Total liabilities and members’ capital | |
$ | 52,029 | | |
$ | 52,761 | |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
| 4. | Marketable
Securities, Fair Value Measurements and Margin Loan |
Marketable
Securities
The
following is a summary of the Company’s available for sale securities as of the dates indicated:
| Schedule of available-for-sale Securities Reconciliation | |
As of March 31, 2023 | |
| | |
Adjusted Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Fair Value | |
| Marketable
Securities: | |
| | | |
| | | |
| | | |
| | |
| Equity securities | |
$ | 9,376 | | |
$ | - | | |
$ | (478 | ) | |
$ | 8,898 | |
| | |
As of December 31, 2022 | |
| | |
Adjusted Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Fair Value | |
| Marketable
Securities: | |
| | | |
| | | |
| | | |
| | |
| Equity securities | |
$ | 3,620 | | |
$ | - | | |
$ | (321 | ) | |
$ | 3,299 | |
| | |
| | | |
| | | |
| | | |
| | |
| Debt securities: | |
| | | |
| | | |
| | | |
| | |
| United States Treasury Bills | |
| 887 | | |
| 7 | | |
| - | | |
| 894 | |
| Total | |
$ | 4,507 | | |
$ | 7 | | |
$ | (321 | ) | |
$ | 4,193 | |
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal
or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.
The
standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last
unobservable, that may be used to measure fair value:
| |
● |
Level
1 – Quoted prices in active markets for identical assets or liabilities. |
| |
|
|
| |
● |
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities. |
| |
|
|
| |
● |
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. |
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
As
of March 31, 2023 and December 31, 2022, the Company’s United States Treasury Bills and money
market funds were classified as Level 1 assets and the Company’s equity securities were classified as Level 2 assets. There
were no transfers between the level classifications during the three months ended March 31, 2023. The fair values of the Company’s
equity securities are measured using readily available quoted prices for these securities; however, the markets for these securities
are not active.
The
carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and other assets,
accounts payable and other accrued expenses and due to related party approximated their fair values as of March 31, 2023 and December
31, 2022 because of the short maturity of these instruments.
As
of March 31, 2023 and December 31, 2022, the estimated fair value our mortgage payable approximated
its carrying value because of the floating interest rate.
The
Company did not have any other significant financial assets or liabilities, which would require revised valuations that are recognized
at fair value.
Margin
loan
The
Company has access to a margin loan from a financial institution that holds custody of certain of the Company’s marketable securities.
The margin loan is collateralized by the marketable securities in the Company’s account. The amounts available to the Company under
the margin loan are at the discretion of the financial institution and not limited to the amount of collateral in its account. No amounts
were outstanding under this margin loan as of March 31, 2023 and December 31, 2022. The margin loan bears interest at LIBOR plus
0.85% (5.71% as of March 31, 2023).
Mortgage
payable, net consisted of the following:
| Schedule of mortgages Payable, Net | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Description | |
Interest Rate | |
Weighted Average
Interest Rate
for the
Three Months Ended
March 31,
2023 | | |
Maturity
Date | |
Amount Due
at Maturity | | |
As of
March 31,
2023 | | |
As of
December 31,
2022 | |
| Revolving Credit Facility | |
AMERIBOR plus 3.15% (floor of 4.00%) | |
| 7.75 | % | |
September 2023 | |
$ | 118,485 | | |
$ | 118,485 | | |
$ | 118,485 | |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Less: Deferred financing costs | |
| |
| | | |
| |
| | | |
| (342 | ) | |
| (305 | ) |
| | |
| |
| | | |
| |
| | | |
| | | |
| | |
| Total mortgages payable, net | |
| |
| | | |
| |
| | | |
$ | 118,143 | | |
$ | 118,180 | |
AMERIBOR
as of March 31, 2023 and December 31, 2022 was 4.95% and 4.64%, respectively.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
Revolving
Credit Facility
The
Company, through certain subsidiaries, has a non-recourse Revolving Credit Facility with a financial institution. The Revolving Credit
Facility provides a line of credit of up to $140.0 million pursuant to which Company may designate its hotel properties as collateral
that allow borrowings up to a 65.0% loan-to-value ratio subject to also meeting certain financial covenants. The Revolving Credit
Facility provides for monthly interest-only payments and the entire principal balance is due upon its scheduled expiration.
Except
as discussed below, the Revolving Credit Facility, which was scheduled to mature on September 15, 2022, bore interest at LIBOR
plus 3.15%, subject to a 4.00% floor. However, on September 6, 2022, the Revolving Credit Facility was amended and is now scheduled
to mature on September 15, 2023. In connection with the amendment of the Revolving Credit Facility, the interest rate was prospectively
changed to AMERIBOR plus 3.15%, subject to a 4.00% floor.
On
June 2, 2020, the Revolving Credit Facility was amended to provide for (i) the deferral of the six monthly debt service payments aggregating
$2.6 million from April 1, 2020 through September 30, 2020, until November 15, 2021; (ii) a 100 bps reduction in the interest rate
spread to LIBOR plus 2.15%, subject to a 3.00% floor, for the six-month period from September 1, 2020 through February 28, 2021;
(iii) the Company pre-funding $2.5 million into a cash collateral reserve account to cover the six monthly debt service payments
which were due from October 1, 2020 through March 1, 2021; and (iv) a waiver of all financial covenants for quarter-end periods before
June 30, 2021.
Subsequently,
on March 31, 2021, the Revolving Credit Facility was further amended providing for (i) the Company to pledge the membership interests
in another hotel as additional collateral within 45 days, (ii) the Company to fund an additional $2.5 million into the cash collateral
reserve account; (iii) a waiver of all financial covenants for quarter-end periods through September 30, 2021 with a phased-in gradual
return to the full financial covenant requirements over the quarter-end periods beginning December 31, 2021 through March 31, 2023; (iv)
an extension of the maturity date from May 17, 2021 to September 15, 2022 upon the pledge of the additional collateral (which
was subsequently completed on May 13, 2021); (v) one additional one year extension option at the lender’s sole discretion; and
(vi) certain limitations and restrictions on asset sales and additional borrowings related to the pledged collateral.
As
of March 31, 2023, all of the Company’s 12 majority owned and consolidated hotel properties were pledged as collateral under the
Revolving Credit Facility and the outstanding principal balance was $118.5 million. Additionally, no additional borrowings were
available under the Revolving Credit Facility as of March 31, 2023. The Company currently intends to seek to extend or refinance the
Revolving Credit Facility on or before its maturity date of September 15, 2023, however, there can be no assurances that it will
be successful in such endeavors.
As of
March 31, 2023, the Company was in compliance with respect to all of its financial debt covenants.
| 6.
| Company’s
Stockholder’s Equity |
Distributions
on Common Shares
On
March 22, 2023, the Board of Directors authorized and the Company declared a Common Share distribution of $0.075 per share for the quarterly
period ending March 31, 2023. The distribution is the pro rata equivalent of an annual distribution of $0.30 per share, or an annualized
rate of 3% based on a share price of $10.00. On April 15, 2023, the distribution for the three-month period ending March 31, 2023 of
$1.3 million was paid in cash.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
On
May 11, 2023, the Board of Directors authorized and the Company declared a Common Share distribution of $0.075 per share for the quarterly
period ending June 30, 2023. The distribution is the pro rata equivalent of an annual distribution of $0.30 per share, or an annualized
rate of 3% based on a share price of $10.00. The distribution will be paid on or about the 15th day of the month following the quarter-end
to stockholders of record at the close of business on the last day of the quarter end.
Future
distributions declared, if any, will be at the discretion of the Board of Directors based on their analysis of the Company’s performance
over the previous periods and expectations of performance for future periods. The Board of Directors will consider various factors in
its determination, including but not limited to, the sources and availability of capital, revenues and other sources of income, operating
and interest expenses and the Company’s ability to refinance near-term debt as well as the IRS’s annual distribution requirement
that REITs distribute no less than 90% of their taxable income. The Company cannot assure that any future distributions will be made
or that it will maintain any particular level of distributions that it has previously established or may establish.
SRP
The
Company’s share repurchase program (the “SRP”) may provide eligible stockholders with limited, interim liquidity by
enabling them to sell their Common Shares back to the Company, subject to restrictions and applicable law.
On
March 19, 2020, the Board of Directors amended the SRP to remove stockholder notice requirements and also approved the suspension of
all redemptions.
Effective
May 10, 2021, the Board of Directors reopened the SRP to allow, subject to various conditions as set forth below, for redemptions submitted
in connection with a stockholder’s death or hardship and set the price for all such purchases to the Company’s current estimated
net asset value per share of common stock, as determined by the Board of Directors and reported by the Company from time to time.
Deaths
that occurred subsequent to January 1, 2020 were eligible for consideration, subject to certain conditions. Beginning January 1, 2022,
requests for redemptions in connection with a stockholder’s death must be submitted and received by the Company within one year
of the stockholder’s date of death for consideration.
On
the above noted date, the Board of Directors established that on an annual basis, the Company would not redeem in excess of 0.5%
of the number of shares outstanding as of the end of the preceding year for either death or hardship redemptions, respectively. Additionally,
redemption requests generally would be processed on a quarterly basis and would be subject to pro ration if either type of redemption
requests exceeded the annual limitation.
For
the three months ended March 31, 2023, the Company repurchased 18,351 Common Shares at a weighted average price per share of $9.45. For
the three months ended March 31, 2022, the Company repurchased 62,043 Common Shares at a weighted average price per share of $8.02.
Earnings
per Share
The
Company had no potentially dilutive securities outstanding during the periods presented. Accordingly, earnings per share is calculated
by dividing net income/loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding
during the applicable period.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
The
Company’s Sponsor, Advisor and their affiliates, including the Special Limited Partner, are related parties of the Company as well
as other public REITs also sponsored and/or advised by these entities. Pursuant to the terms of various agreements, certain of these
entities are entitled to compensation and reimbursement of costs incurred for services related to the investment, development, management
and disposition of the Company’s assets. The compensation is generally based on the cost of acquired properties/investments and
the annual revenue earned from such properties/investments, and other such fees and expense reimbursements as outlined in each of the
respective agreements. Additionally, the Company’s ability to secure financing and its real estate operations are dependent upon
its Advisor and its affiliates to perform such services as provided in these agreements. Amounts the Company owes to the Advisor and
its affiliated entities are principally for asset management fees, and are classified as due to related parties on the consolidated balance
sheets.
The
following table represents the fees incurred associated with the payments to the Company’s Advisor for the periods indicated:
| Schedule of fees payments to Company's Advisor | |
| | |
| |
| | |
For the
Three Months Ended
March 31, | |
| | |
2023 | | |
2022 | |
| Asset management fees (general and administrative costs) | |
$ | 659 | | |
$ | 738 | |
The
advisory agreement has a one year term and is renewable for an unlimited number of successive one year periods upon the mutual consent
of the Advisor and the Company’s independent directors. Payments to the Advisor or its affiliates may include asset acquisition
fees and the reimbursement of acquisition-related expenses, development fees and the reimbursement of development-related costs, financing
coordination fees, asset management fees or asset management participation, and construction management fees. The Company may also reimburse
the Advisor and its affiliates for actual expenses it incurs for administrative and other services provided for it. Upon the liquidation
of the Company’s assets, it may pay the Advisor or its affiliates a disposition commission.
Subordinated
Profits Interests
In
connection with the Company’s Offerings, the Associate General Partner, an affiliate of the Company’s Sponsor, contributed
an aggregate of $17.7 million consisting of (i) cash of $12.9 million and (ii) equity interests in the Brownmill Joint Venture valued
at $4.8 million to the Operating Partnership in exchange for 177.0 Subordinated Profits Interests in the Operating Partnership with an
aggregate value of $17.7 million, which are included in noncontrolling interests in the consolidated balance sheets.
These
Subordinated Profit Interests, for which the aggregate consideration of $17.7 million will be repaid only after stockholders receive
a stated preferred return in addition to their net investment, entitle the Associate General Partner to a portion of any regular distributions
made by the Operating Partnership. There were no distributions paid on the Subordinated Profit Interests through December 31, 2016. However,
in connection with the Board of Directors declaration of a special distribution on the Company’s Common Shares on February 28,
2017, they also declared that distributions be brought current through December 31, 2016 on the Subordinated Profits Interests at a 7%
annualized rate of return which amounted to $4.2 million and were paid to the Associate General Partner on March 15, 2017. Beginning
with the first quarter of 2017, the Company’s Board of Directors declared and the Company paid regular quarterly distributions
on the Subordinated Profits Interests at an annualized rate of 7.0% along with the regular quarterly distributions on its Common
Shares for all quarterly periods through December 31, 2019.
These
Subordinated Profits Interests may entitle the Associate General Partner to a portion of any regular distributions that the Company makes
to its stockholders, but only after its stockholders have received a stated preferred return. There have been no distributions declared
on the Subordinated Profits Interests for any periods after December 31, 2019. Since the Company’s inception through March 31,
2023, the cumulative distributions declared and paid on the Subordinated Profits Interests were $7.9 million. Any future distributions
on the Subordinated Profits Interests will always be subordinated until stockholders receive a stated preferred return.
The
Subordinated Profits Interests may also entitle Lightstone SLP II, LLC to a portion of any liquidating distributions made by the Operating
Partnership. The value of such distributions will depend upon the net sale proceeds upon the liquidation of the Company and, therefore,
cannot be determined at the present time. Liquidating distributions to Lightstone SLP II, LLC will always be subordinated until stockholders
receive a distribution equal to their initial investment plus a stated preferred return.
LIGHTSTONE
VALUE PLUS REIT II, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands, except per share/unit
data and where indicated in millions)
(Unaudited)
| 8. | Commitments
and Contingencies |
Management
Agreements
The
Company’s hotels operate pursuant to management agreements (the “Management Agreements”) with various third-party
property management companies. The property management
companies perform management functions including, but not limited to, hiring and supervising employees, establishing room prices,
establishing administrative policies and procedures, managing expenditures and arranging and supervising public relations and
advertising. The Management Agreements are for terms ranging from 1 year to 10 years, however, the agreements
can be cancelled for any reason by the Company after giving 60 days’ notice after the one year anniversary of the commencement
of the respective agreement.
The
Management Agreements provide for the payment of a base management fee equal to 3% to 3.5% of gross revenues, as defined, and
an incentive management fee based on the operating results of the hotel, as defined. The
base management fee and incentive management fee, if any, are recorded as a component of property operating expenses in the consolidated
statements of operations.
Franchise
Agreements
As
of March 31, 2023, the Company’s hotels operated pursuant to various franchise agreements. Under the franchise agreements, the
Company generally pays a fee equal to 5% of gross room sales, as defined, and a marketing
fund charge from 1.5% to 3.5% of gross room sales. The franchise fee and marketing
fund charge are recorded as a component of property operating expenses in the consolidated statements of operations.
The
franchise agreements are generally for initial terms ranging from 15 years to 20 years, expiring between 2025 and
2037.
Legal
Proceedings
From
time to time in the ordinary course of business, the Company may become subject to legal proceedings, claims or disputes.
As
of the date hereof, the Company is not a party to any material pending legal proceedings of which the outcome is probable or reasonably
possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure
of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings
in which the potential loss is deemed to be remote.
PART
I. FINANCIAL INFORMATION, CONTINUED: